The Importance of Financial Information Systems

3318 words (13 pages) Essay in Finance

23/09/19 Finance Reference this

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The Importance of financial information systems

Section A

Generally, the day to day running of a business organization comprises of several transactions which the firm engages in. As a result, there is a need to always keep the records in a systematic manner for decision making and for reference. Accounting is a systematic way of recording business transactions. The data of all the transactions are recorded and kept mainly for future use. These data are tracked and recorded in a computer-based system (financial accounting system) to facilitate the accuracy of the data. The main users of the accounting information are the shareholders, the creditors, financial analysts, vendors, and government agencies. There are various categories of books and documents in which the accounting information is kept. For instance, the books of original entry which comprises of various journals such as cash journal, general journal, purchase journal, and sales journal; and the source documents like, cash receipts, bank statements, and cash statements.

The information from the books of original entries is later posted in the general ledger where financial statements are drafted. A cash flow statement is a financial report keeps the records of the company inflows and outflows of cash. The statement indicates the net change of an organization and helps to detect the liquidity level of a given firm. On this score, the firm owners can be able to notice whether the company is gaining cash or undergoing losses. In case the company experiences more inflow of cash than the outflow, then it is said to have a positive cash flow. A negative cash flow is attained when the there is much outflow of cash than the inflow, (Maskell, et al., 2016, p. 84).

The other document used in recording the transactions of a business entity is the income statement. The income statement also called the financial statement is a statement used to record the financial performance of a given organization. It is as important as it helps an organization to detect the amounts profit it has made during a given period of time in its operations. The information captained in the financial statements are used by the investors, analysts, and creditors to gauge the financial performance of the firm. Since income statements indicate the profit made by a business after a certain trading period, the investors can use the information in it to gauge the viability of investing in the business. They could detect the risk of losses before they take the step of financing it.

Essentially, the recorded data is compared to the past records in different periods of time. This is referred to as statistical data which summarizes the historical behaviors and tries to forecast the future behavior of the financial records, (Ottman, 2017). The statistical data enables correct interpretation used for proper decision making. This interpretation involves different analyst to accurately propose the future position of the entity based on the statistical data. Additionally, the statistical data contains facts and figures which enable the users to read the trends in the data, such as the investor, to make precise decisions in the future investments.

After the recording, the business transactions over a given period of time known as a trading period, the requirement of all firms depicts that an annual report must be disclosed to the interested parties. Mainly performed by the chief financial officers of the company, the annual report a comprehensive report declaration on the firm’s activities throughout the previous year. The report is mainly needed by the shareholders in the organization and other parties with interest to evaluate the financial performance of the business. The firms which are registered under the stock exchange market are required to perform the annual report regularly in order to keep the shareholders updated about their share market. The government also requires companies to disclose their annual reports to necessitate the calculation of the amount of tax which should be levied on the organization.

 Based on the proceeding data, analysis of how the items are decreasing or increasing in the business is taken. The trend analysis is a method by which company owners use to predict what might happen to different items in the future affecting the financial performance of the business. After analyzing the trend in the data recorded, the shareholders are able to make both short and long-term predictions about the progress of the business. In order for an organization to perform a proper trend analysis, it must examine carefully the past data and the performance that led to the data, it should keep into consideration the current financial conditions, then use the patterns in data recorded to predict the future financial health of the firm, (Laudon, & Laudon, 2015, p. 79).

Accounting information system is basically the use of computers to track every accounting records of a business entity. The information tracked is majorly used in decision making by the management of the organization. In order to propagate the effective management of any company, the information contained in the accounting books must be keenly observed to enhance success in the business. Given that the management is always answerable to various parties like the shareholders and the government, the accounting information offers management with the required facts used in concluding the business affairs and reporting to the vendors of the organization.

Centered on the organization’s decision making, the accounting information also enables the management to make the needed adjustment in the operation of the business. The adjustments arise when the enterprise experiences loss during their last trading period. The decision on implementing new methods of running the organization is put in place to enable it to avoid making further losses, (Cao, et al., 2015, p. 426). Alternatively, when records show that the company has gained great profits from its last period operation, the management will make the decision of impressing the methods of operation the company applied last to attain the profit. Scrutinizing the information on the financial statement by the management enables it to assess the behavior and patterns of each item resulting in a concrete decision that could compel the business to flourish in the future, (Collier, 2015, p 20).

Section 2

Question 1

According to the chart, the highest Boots Company earner is the Bathroom toiletries. It has increased the general market spent by 2.9%. The sales in this section have witnessed an increase of £19.3 Million. On the same note, the bathroom section has caused an increase in the packs sales by £11 million. In total, the product share of the Bathroom section in the company takes 698 product share. Others include hair care = 263, oral care = 227 and other commodities = 201. The percentage of the Bathroom, in this case, will be evaluated as shown below;

Total Products = 698+263+227+201

     =1389

 Bathroom = 698 

 Bathroom percentage =

6981389×100%

    = 50.25%

Question 2

A fully labeled pie chart showing the various aspects of Boot’s business

The pie chart above represents the distribution of various aspects in Boots Company. The product share of the bathroom products are equivalent to 50% of the pie chart. The percentage of hair care products are 19%, oral care products equals to 16%. The other remaining percentage of 15% I occupied by the other products that the organization deals with.  The chart illustrates out that the sales of the bathroom products are doing well thus resulting to the company increasing its stock of the product.

Question 3

Different products sold by Boots Company perform differently on their sale at the market. The products include the bathroom toiletries, hair care products, oral care and other health and beauty products supplied by the organization. Generally, analysis on the market performance shows that bathroom products are doing better than the rest of the products. The percentage sale of the bathroom and skin care products amount to 50%. As indicated in the pie chart, the hair care products are in the second place having a percentage sale of 19%. This trend indicates that the company has majored in the sale of bathroom thus it thrives much better than other products. In order to balance sales for every commodity, the organization should use proper marketing strategies to boost the sales I the areas lugging behind.

On the same accord, oral care products are also not well sold as compared to either bathroom or hair products. Their sale in the trading period amounted to 16%. The rest of the goods that the organization deals with had a sale of about 15%. Generally, the firm is thriving in its sale of bathroom products than the rest of the goods. Moreover, it is worth noting that the grocers section attained a sale of 53% which was a slight decrease from the previous year sale of 51.5%. The non-grocer had a sale of 47% which recorded an increase of from the previous year sale of 1.5%. Subdivided into various sub-sections, all the component products contained in the non-grocers achieved an increased sale during the recorded period apart from drug stores which recorded a negative deviation of 0.2%. Other products in non-grocer attained a positive deviation of 0.7 %. Conclusively, the products which experienced an increase in its sale boasted the general market performance of the company, leading to an increased market expenditure by 2.9%.

Question 4

Agreeably, although Boots Company sells various health and beauty products, it is vivid that the sale of the products or the performance of each section of the product at the market varies from each other. For instance, the company’s stronghold product sale is based in the bath and shower products. Boots Company has experienced great sales in the bathroom sector leaving other products behind. The increased sales of the bathroom commodities elevated the sales of the company in general. However, Boosts Company should stress on much better sales of the same products alongside formulating methods of boosting the sales of the products which did not perform well within the period, (Ottman, 2017, p. 113).

There are other products in the grocers market which are not doing well in terms of sales.  Agreeably, since the company skin care products are doing better than the products in the grocers market, several strategies should be put in place to improve on the areas that are lagging behind. For instance, the company can intensify product promotion to boost sales. Implementation of proper product promotion like conducting advertisement to inform the market on the presence of the product boosts its sales. Additionally, advertisement helps to reignite the brand of a product in the market which eventually, lifts the sales. Effective product promotion will lead to improved sales in oral care and hair care products.

Alternatively, the firm can boost the sales in the grocers market by analyzing the competition from other firms which supplies the same kind of products. Studying the competition enables a firm to formulate a method which could give it a unique advantage over other competitors to attract the much attention of the market. Proper study on the competition will ensure that Boots Company implements the ideas from the competitors and capitalize on their areas of weaknesses so that the sale of the lugging behind the product is increased. The company can reduce the price charge per the commodities in order to increase the number of buyers. Vividly, the firm had been selling commodities, especially in the health sector, at a relatively higher price. This lead to several complaints from the market and the public in general. It is also clear that the high prices charged on the medicinal products like emergency pills contributed to the lower sales in the non-grocer section. Making correction in this to revive the sale will entail a reduction of prices of such commodities, thus attracting more market to the company products.

The other way of improving the sales in both grocer and the non-grocer section is by use of marketing strategies to mobilize the market about the products. Although the grocers showed a slight improvement in their sale than the grocers, the market sale of the grocers’ products was relatively higher than the non-grocers which total sales percentage was 47%. When the market is mobilized through intensive market promotions, the market expenditure will increase favoring the sale of the company products. Through market promotions, there will be an increase in demand power by the consumers, arouse market demand and improves the availability of the product.

Conclusively, balancing the sales of different product in a firm is as important as it allows the firm to diversify its risks. A single product company may undergo great losses if the product encounters unfavorable environment in the market. On this score, the company with a wide range of products is able spread the risks in its operation. When one aspect fails to perform, the other performing products counters its space enabling the company not to undergo a sharp loss. Therefore, it is essential for Boots Company to stabilize the sales of all of its products to avoid the risk which may emanate on dealing with a single product.  Through implementation of proper managerial strategies, advertisements and proper market strategies, the sale of the grocer market section will also improve as witnessed in bathroom products.

Question 5

The success of a business depends entirely on the appropriate interpretation of the accounting information and proper decision made thereafter. Comparing the accounting records over the past five years enables the investors to realize the trends and patterns that the business undergoes and as a result, they measure its financial performance. They combine the information from different documents in the accounting systems and make a decision according to the data recorded. In the Boots Company, accounting information in the five years since 2014 was compared. The transactions involving different items in 2014 enabled the business to attain a gross revenue of $20.25bn. The gross income was achieved from the sale of its product in the same year was $76.39bn. Since then, the company has been making a tremendous increase in the sale of its products. It was able to get a gross profit of $25.18B in 2015, $28.16B in 2016, $27.51B in 2017 and $29.02B in the year 2018. Based on the data recorded, the company has been experiencing an increase in sales over the past last years.

The net profit also called the net income has undergone successive increase over the different trading periods provided. In the year 2014, the net income stood at $1.9 billion. The subsequent year attained an increase of about $2.3 billion standing at a total of $4.2B. The company continued to thrive boosting its markets sale and net income as indicated; 2016 net incomes was $4.17 billion, 2017 income was $4.08 billion and finally, in the year 2018, the net income achieved was $5.02 billion.

Averagely, the mean of data collected in the net income is given by totaling the net incomes in various years and divide the sum by 5. This is indicated below.

1.9+4.2+4.17+4.08+5.025

The mean = $3.058 billion

The company makes an average income of $3.058 billion in the last five years, which indicates that it is generally doing well in its operations.

The standard deviation is taken on the net income rated as calculated below;

Standard deviation =

(xx̅)2n

 = (1.322+1.322+1.044+1.044+3.849)

÷

5= 1.716

The square root of 1.716 = 1.31(the standard deviation)

The standard deviation according to the data records in the Boots Company stands at 1.716

The standard deviation is used to detect the volatility of the net income from 2014 to 2018 is wide. Generally, for an organization to perform effective risk measurement, it requires to focus on the mean and the standard deviation of its sales and other items that indicates the financial position and performance of the business. Investor, managers and analysts assess the volatility of the business net incomes over years to enable them predict the probability of attaining either profits or losses. From the standard deviation calculation, the Boots Company is increasingly earning high revenues in the recent years than in its past trading period.

Furthermore, the above data based on both the gross and net income of Boots Company indicates that the organization has managed well its expenditures, reducing them to the minimum and maximizing the revenues earned by the firm. When the expenses are minimized so that a firm elevates the amount earned as revenue, it attains high amounts in net profit, (Gitman, et al., 2015).  On the other hand, a company is said to attain a negative net profit (net loss) when its expenses exceed the amount of revenue earned, which eventually may lead to the collapsing of the company. I this case study, Boots Company is thriving since its revenues are more than the expenses incurred.

Decisively, for a business organization to excel in its business operations in has to perform proper accounting for record keeping which is eventually used in the decision making. Business entities thrive when its management makes proper decisions pertaining to it. On the same score, the financial accounting information is essential in making any possible adjustments to ensure that sale of the firm products rises. A firm also needs to reduce its operational expenditure and increase the amount of revenue earned so as to boost the net income. Additionally, implementation of proper management and marketing strategies promotes the company to achieve its success in the operation of the business. Proper managerial strategies involve identifying the company strengths and capitalizing on them alongside realizing the weakness and engage proper ways of elevating it.

Reference List

  • Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge.
  • Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
  • Laudon, K.C. and Laudon, J.P., 2015. Management information systems (Vol. 8). Prentice Hall.
  • Maskell, B.H., Baggaley, B. and Grasso, L., 2016. Practical lean accounting: a proven system for measuring and managing the lean enterprise. Productivity Press.
  • Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
  • Ottman, J., 2017. The new rules of green marketing: Strategies, tools, and inspiration for sustainable branding. Routledge.
  • Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement audits. Accounting Horizons29(2), pp.423-429.

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